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NATIONAL CREDIT REGULATIONS

NATIONAL CREDIT REGULATIONS. Objective. Overview of implementation of the National Credit Act Effective dates Appointment of Board and Tribunal Section 73 Regulations To present and discuss policy underlying regulation of interest and fees in terms of National Credit Act

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NATIONAL CREDIT REGULATIONS

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  1. NATIONAL CREDIT REGULATIONS

  2. Objective • Overview of implementation of the National Credit Act • Effective dates • Appointment of Board and Tribunal • Section 73 Regulations • To present and discuss policy underlying regulation of interest and fees in terms of National Credit Act • Briefing on establishment of the National Credit Regulator

  3. Implementation Phase 1: Establishment of Institutional Framework 1 June 2006 • National Credit Regulator is established (Chapter 2) • All sections pertaining to the interpretation, purpose and application of the Act (Chapter 1) • All provisions related to the registration of credit providers, credit bureaux and debt counselors (Chapter 3) • General provisions related to dispute settlement (Chapter 7), • Enforcement of the Act (Chapter 8), • General provisions (Chapter 9) • Transitional arrangements (Schedules 1, 2 and 3) Phase 2: Credit Bureau compliance 1 September 2006 • All provisions pertaining to the regulation of and compliance by credit bureaux (sections 67, 68, 70 and 72) • National Consumer Tribunal is established Phase 3: Full implementation 1 June 2007 • All remaining provisions • Provisions on consumer rights (Chapter 4 Part A) • Credit marketing practices, over-indebtedness and reckless credit (Chapter 4 Part C and D) • Consumer credit agreements (Chapter 5) • Debt enforcement (Chapter 6) • Section 163 which relates to agents

  4. Implementation • Board & Tribunal process:- • to appoint National Credit Regulator Board, and • to appoint members of the National Consumer Tribunal in process • Section 73 Regulations • Process commenced to develop draft regulations • Focus group sessions scheduled for early September 2006 • Publish for public comment by middle of September 2006 • Discussions with Portfolio Committee • Publish final regulations by early November 2006

  5. Regulation of Interest & Fees

  6. International lessons • World Bank & CGAP strong positions against interest regulation • Yet, nearly all countries have some sort of regulation, (also African & Asian countries) with UK & certain S.American countries the prime exceptions • Cap can be single “one size fits all” eg Australia, Switzerland, Brazil or structured eg Belgium, France • Australia: 2 states with high cap, but origination fee excluded • Different approaches in different states in the US • Visits to Belgium & France some inspiration, but many similar challenges • France: huge costly surveys, with implicit trade-offs • Belgium: APR caps differentiated by product, with attempts to link to financial instruments; ‘lie factor’ … political problems • Technically complex & politically sensitive… no easy solution … no “generally accepted logic”

  7. Currently, Access skewed, high cost Low / middle income market little access to main stream providers & main stream products Vision, More mortgage finance to low/middle income market & credit cards substitute for m/loans … … more consumer options … better disclosure, enforcement, redress … & lower debt burdens Drive down interest rates over time and prevent abusive pricing from migrating to main stream products Credit Market

  8. Spectrum of Financial Provision Share of population 31% 34% 30% 6% • low-middle income consumers has limited access to main stream, low cost products; • lowest income consumers without access to formal sector credit

  9. Observations • Segmented market • High rates in exempt market, but also high variability • Exempt market main source of formal credit for LSM4-6 (6 m or 25% of pop) • High rates due to poor info; high default rates; uncertainty; weak disclosure, etc • Usury credit above cap – esp. short term – other fees such as admin, club, credit life Source: FEASibility, 2003; MFRC, 2004

  10. trade-offs, challenges • Unrealistic limits could cause havoc & risk bank failures • Small loans are more costly than large loans, cannot be done at same “effective interest rates” • Need incentive for increased supply of main stream products by main stream banks to excluded consumers … e.g. housing finance, credit cards, SMME finance • Huge differences in cost & risk of different products, different institutions … & weak/contradictory data • Weaknesses in competition & disclosure … likelihood of overpricing if caps too high, particularly dangerous for revolving credit • But, if caps too close to “minimum” = no competition, smaller providers & new bank entrants driven out of market … no innovation • Impact of Credit Act much wider than interest regulation, e.g. disclosure, marketing limitations, Reckless Lending limits will reduce loan volumes … Have to recognize these trade-offs in setting limits

  11. Determining limits • Implications:- • New legislation (& better disclosure) would improve market conditions … but this would take time • Not “price control”, but, parameters within which increased competition should determine actual prices • Curb extremes without driving any products underground

  12. Structure of Regulation Super profits eliminated over time

  13. Formula Interest • Mortgage agreements = [(RR x 2.2) + 5%] • Unsecured credit = [(RR x 2.2) + 20%] • Other = [(RR x 2.2) + 10%] • Short term & Incidental = 5% pm & 2% pm Initiation Fees • Mortgage = R1,000 + 10% of amount > 10,000, limited to R5,000 • Other = R150 + 10% of amount > R1,000, limited to R1,000 Monthly • R50 per month

  14. Examples Mortgage agreement Buy a house for R300 000 Maximum Cost of Credit • 20% interest • R5000 initiation fee R1000 per credit agreement, plus, 10% of the amount of the agreement in excess of R10 000, but never to exceed R5 000 R1000 + (10% of R290 000 = R29 000) = R30 000, but max R5 000 • R50 monthly service fee

  15. Examples Credit facility Obtain store card with R3000 limit, spend to the limit Maximum Cost of Credit • 25% interest • R5000 initiation fee R150 per credit agreement, plus, 10% of the amount of the agreement in excess of R1,000, but never to exceed R1,000 R150 + (10% of R2 000 = R200) = R350 • R50 monthly service fee

  16. Examples Unsecured credit transaction Borrow R5000 on a personal loan for undisclosed reasons Maximum Cost of Credit • 35% interest • R550 initiation fee R150 per credit agreement, plus, 10% of the amount of the agreement in excess of R1,000, but never to exceed R1,000 R150 + (10% of R4 000 = R400) = R550 • R50 monthly service fee

  17. Examples Short term loan – max 6 months, max R8,000 Borrow R800 from small lender Maximum Cost of Credit • 5% interest per month (30% for 6 months) • R120 initiation fee R150 per credit agreement, plus, 10% of the amount of the agreement in excess of R1,000, but never to exceed R1,000, or 15% of loan 15% of R800 = R120 • R50 monthly service fee

  18. National Credit Regulator • Overview of establishment • Appointment of Staff • Move to new premises • Briefing stakeholders • etc

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